ROI : The cost factor

What do I get back ('return') for the money I'm being asked to spend ('investment')?What is it really worth (the "ROI")?Return on Investment is one of approaches to building a financial business case. The term means that decision makers evaluate the investment potential by comparing the magnitude and timing of expected gains to the investment costs.

Technology as anything has become more of a commodity and so defining ROI more a definite possibility and close to reality. Before we delve into deeper realms of concept and applicability of ROI to ERP investments, it would be pertinent to understand the costs involved:

A: Upfront Software cost: Each vendor has a different product and pricing structure. A lot would offer complete functionality (all modules) and pricing along the lines of named or concurrent users. Some would provide you a flexibility to decide the modules and then settle on the number of concurrent users.

A concurrent user concept provides the flexibility of planning the usage of your system e.g. suppose you have bought 10 concurrent users for about 20 employees from different departments who would actually access the system at a different time during the day or even weeks. A case in point could be weeks near the end of financial year, which would require extensive usage of the system by Finance users, and they can very well utilize the HR or may be even other non-critical free users at that time.

Make full utilization of the modularity concept. You may use only 40 % of the total ERP functionalities. Can you buy 40 % of the software today and reduce cost? Try to extract the maximum of the modularity principle; it has been devised for easy adoption of ERP. Be careful to simulate on whether the costs really scale down.Go for investment in phases rather than spending the whole budget in a single shot. Trust me, the upfront software costs comprise approx. 40 % of the total investment on ERP.

B: Implementation cost (from Start of implementation to Go Live stage on the new system)You would hear all the success stories about ERPs from different vendors. Remember, there would be an equivalent number of failure stories, which had created the fear psychosis and a deterrent to this investment. It’s the same software which was successful and which failed.

Here comes the value of right implementation partner. Does your partner have requisite expertise on the product or have smarter salesperson? Are they adding ‘definite’ element to the implementation costs? Go for implementation in phases. You would see the results as you go along the process.

C: Infrastructure cost (Cost of Hardware, database etc.): Make these costs as an integral component of the total budget. Though there won’t be much difference in infrastructure requirements for most of the solutions offering similar functionalities but they do add to the final cost.

D: Upgrade cost (Annual Support fees to cover the patches, updates and version upgrades): ERP is a continuous process, so is the cost associated with it. Upgrades are future versions, new releases, patches, and bug fixes, even new features that are offered by the vendors over the time. In this evolving technology world, the only thing constant is change.

Select a vendor who had released new versions over the past and has a definite roadmap for the product for at least the next couple of years. A lot of customers of a particular ERP player in UK had stopped paying the support charges, as there was no upgrade or new versions over the years.

What’s the value to pay on this head? Is your support cost % of discounted or List Price ?E : Training/Manpower cost: More than their Big brothers, SMBs need a system, which is easy to use, needs minimal vendor intervention to run it. I am not talking of training for few weeks, which is part of implementation process. Do your people know to use the system after the implementation partner has left? How can my people without any IT background can learn something for which there are certified courses for 3-4 months?

SMBs need to run their business and not an ERP company. Some of the big guys like Flextronics, Siemens etc. could afford to set their own ERP companies for in house implementations. User-friendly systems reduce the Total Cost of Ownership and thus present an early favorable equation for ROI.

Proper planning on A’s, B’s, C’s, D’s and E’s can result in a favorable ROI.

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4 Comments

The point is well taken - need to clearly identify ERP cost and benefit in recommendation of ERP to sr management or whoever the decision maker is. However, ROI is an accounting term and applicable to a point in time such as monthly closing or year end closing. Since the front end investment (40% according to Raul) is substantial but the returns come after the system is installed (including any engineering that is done in the existing orgnization), the return measure is similar to any project involving capex such as plant and equipment - e.g., DCF or simple payout.

This is a good post. I had a similar post, with some additional categories, on my blog at:
blogs.ittoolbox.com/erp/roi
Thanks for the good insights.
Eric Kimberling
Panorama Consulting Group LLC
www.panorama-consulting.com

As technological evangalists we need to get in the shoes of the business owner. What is bothering him the most ? Is it the low resoure utilisation, higher costs, cost of inventory, ageing analysis, Working capital mgmt (pain areas). The "value" proposition makes the difference. Look at the ROI/TCO issue in that context.

According to Aberdeen's TCO of ERP report, Lawson had the lowest total cost of the tier 1 and tier 2 solutions evaluated. Lawson is a highly functional, multi-platform system which is commonly overlooked in an ERP selection. The just purchased an SMB PLM solution and have a barebones CRM, on the M3 side. Another nice native i Series option for SMB manufactures is Solarsoft CMS. It is another highly functional (multi-language, multi-currency, MRP, and integration (ETP) tools for BI implementation. Check out the white paper at erpinformationcenter.blogspot.com.

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Follow one Business Manager & Consultant Analyst as he tackles the daily challenges of helping SMB's acheive better ERP solutions at lower costs. Guided by years of experience with global software and customer communities in India, SE Asia, and the UK, he is able to provide helpful solutions that enable SMB's to make informed decisions when selecting enterprise solutions.
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